Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 12, 2013



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number: 001-32312
Novelis Inc.
(Exact name of registrant as specified in its charter) 
Canada
 
98-0442987
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
3560 Lenox Road, Suite 2000
Atlanta, Georgia
 
30326
(Address of principal executive offices)
 
(Zip Code)
Telephone: (404) 760-4000
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
ý
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of August 12, 2013, the registrant had 1,000 shares of common stock, no par value, outstanding. All of the registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the registrant’s parent company.





Novelis Inc.
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 


2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In millions)
 
Three Months Ended June 30,
 
2013
 
2012
Net sales
$
2,408

 
$
2,550

Cost of goods sold (exclusive of depreciation and amortization)
2,105

 
2,202

Selling, general and administrative expenses
120

 
102

Depreciation and amortization
77

 
73

Research and development expenses
10

 
12

Interest expense and amortization of debt issuance costs
76

 
74

Gain on assets held for sale

 
(5
)
Restructuring charges, net
9

 
5

Equity in net loss of non-consolidated affiliates
4

 
2

Other income, net
(10
)
 
(27
)
 
2,391

 
2,438

Income before income taxes
17

 
112

Income tax provision
3

 
21

Net income
14

 
91

Net income attributable to noncontrolling interests

 

Net income attributable to our common shareholder
$
14

 
$
91

See accompanying notes to the condensed consolidated financial statements.


3



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In millions)
 
 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Attributable to
Our Common
Shareholder
 
Attributable to
Noncontrolling
Interests
 
Total
 
Attributable to
Our Common
Shareholder
 
Attributable to
Noncontrolling
Interests
 
Total
Net income
$
14

 
$

 
$
14

 
$
91

 
$

 
$
91

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(2
)
 
(1
)
 
(3
)
 
(81
)
 
(1
)
 
(82
)
Net change in fair value of effective portion of cash flow hedges
(46
)
 


 
(46
)
 
(28
)
 

 
(28
)
Net change in pension and other benefits
6

 

 
6

 
24

 

 
24

Other comprehensive loss before income tax effect
(42
)
 
(1
)
 
(43
)
 
(85
)
 
(1
)
 
(86
)
Income tax benefit related to items of other comprehensive loss

 

 

 
(1
)
 

 
(1
)
Other comprehensive loss, net of tax
(42
)
 
(1
)
 
(43
)
 
(84
)
 
(1
)
 
(85
)
Comprehensive (loss) income
$
(28
)
 
$
(1
)
 
$
(29
)
 
$
7

 
$
(1
)
 
$
6

 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the condensed consolidated financial statements.


4



Novelis Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In millions, except number of shares)
 
June 30, 2013
 
March 31, 2013
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
249

 
$
301

Accounts receivable, net
 
 
 
— third parties (net of allowances of $3 as of June 30, 2013 and $3 as of March 31, 2013)
1,477

 
1,447

— related parties
45

 
38

Inventories
1,147

 
1,168

Prepaid expenses and other current assets
103

 
93

Fair value of derivative instruments
96

 
109

Deferred income tax assets
132

 
112

Assets held for sale
9

 
9

Total current assets
3,258

 
3,277

Property, plant and equipment, net
3,201

 
3,104

Goodwill
611

 
611

Intangible assets, net
642

 
649

Investment in and advances to non–consolidated affiliates
633

 
627

Fair value of derivative instruments, net of current portion
1

 
1

Deferred income tax assets
46

 
75

Other long–term assets
 
 
 
— third parties
166

 
165

— related parties
13

 
13

Total assets
$
8,571

 
$
8,522

LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long–term debt
$
30

 
$
30

Short–term borrowings
719

 
468

Accounts payable
 
 
 
— third parties
1,062

 
1,207

— related parties
50

 
47

Fair value of derivative instruments
117

 
74

Accrued expenses and other current liabilities
508

 
497

Deferred income tax liabilities
22

 
28

Liabilities held for sale
1

 
1

Total current liabilities
2,509

 
2,352

Long–term debt, net of current portion
4,423

 
4,434

Deferred income tax liabilities
423

 
504

Accrued postretirement benefits
738

 
731

Other long–term liabilities
268

 
262

Total liabilities
8,361

 
8,283

Commitments and contingencies

 

Shareholder’s equity
 
 
 
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of June 30, 2013 and March 31, 2013

 

Additional paid–in capital
1,654

 
1,654

Accumulated deficit
(1,163
)
 
(1,177
)
Accumulated other comprehensive loss
(310
)
 
(268
)
Total equity of our common shareholder
181

 
209

Noncontrolling interests
29

 
30

Total equity
210

 
239

Total liabilities and equity
$
8,571

 
$
8,522

See accompanying notes to the condensed consolidated financial statements.

5



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)
 
Three Months Ended June 30,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
14

 
$
91

Adjustments to determine net cash used in operating activities:
 
 
 
Depreciation and amortization
77

 
73

Loss (gain) on unrealized derivatives and other realized derivatives in investing activities, net
23

 
(16
)
Gain on assets held for sale

 
(5
)
Deferred income taxes
(76
)
 
(16
)
Amortization of fair value adjustments, net
3

 
6

Equity in net loss of non–consolidated affiliates
4

 
2

Gain on foreign exchange remeasurement of debt
(2
)
 
(7
)
Loss (gain) on sale of assets
1

 
(2
)
Amortization of debt issuance costs and carrying value adjustments
6

 
6

Other, net
(1
)
 
1

Changes in assets and liabilities including assets and liabilities held for sale (net of effects from acquisitions and divestitures):
 
 
 
Accounts receivable
(29
)
 
16

Inventories
12

 
(75
)
Accounts payable
(149
)
 
19

Other current assets
3

 
(31
)
Other current liabilities
13

 
(54
)
Other noncurrent assets
2

 
(2
)
Other noncurrent liabilities
(3
)
 
(11
)
Net cash used in operating activities
(102
)
 
(5
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(181
)
 
(167
)
Proceeds from sales of assets, third party, net

 
10

Proceeds from sale of assets, related party, net

 
2

Proceeds from related party loans receivable, net

 
2

Proceeds (outflow) from settlement of other undesignated derivative instruments, net
(6
)
 
1

Net cash used in investing activities
(187
)
 
(152
)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of debt
42

 
12

Principal payments
(17
)
 
(5
)
Short–term borrowings, net
219

 
92

Dividends, noncontrolling interest

 
(1
)
Debt issuance costs
(7
)
 

Net cash provided by financing activities
237

 
98

Net decrease in cash and cash equivalents
(52
)
 
(59
)
Effect of exchange rate changes on cash

 
5

Cash and cash equivalents — beginning of period
301

 
317

Cash and cash equivalents — end of period
$
249

 
$
263


See accompanying notes to the condensed consolidated financial statements.

6



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (unaudited)
(In millions, except number of shares)
 
 
Equity of our Common Shareholder
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss) (AOCI)
 
Non-
controlling Interests
 
Total Equity
 
Shares
 
Amount
Balance as of March 31, 2013
1,000

 
$

 
$
1,654

 
$
(1,177
)
 
$
(268
)
 
$
30

 
$
239

Net income attributable to our common shareholder

 

 

 
14

 

 

 
14

Net income attributable to noncontrolling interests

 

 

 

 

 

 

Currency translation adjustment, net of tax provision of $ — included in AOCI

 

 

 

 
(2
)
 
(1
)
 
(3
)
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $2 included in AOCI

 

 

 

 
(44
)
 

 
(44
)
Change in pension and other benefits, net of tax provision of $2 included in AOCI

 

 

 

 
4

 

 
4

Balance as of June 30, 2013
1,000

 
$

 
$
1,654

 
$
(1,163
)
 
$
(310
)
 
$
29

 
$
210

See accompanying notes to the condensed consolidated financial statements.


7

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)




1.    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References herein to “Novelis,” the “Company,” “we,” “our,” or “us” refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to “Hindalco” refer to Hindalco Industries Limited, our parent company. In October 2007, the Rio Tinto Group purchased all the outstanding shares of Alcan, Inc. References herein to “Alcan” refer to Rio Tinto Alcan Inc.
Description of Business and Basis of Presentation
Novelis Inc. was formed in Canada on September 21, 2004. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the transportation, electronics, architectural and industrial product markets. We also have recycling operations in many of our plants to recycle post-consumer aluminum, such as used-beverage cans (UBCs). As of June 30, 2013, we had manufacturing operations in nine countries on four continents: North America, South America, Asia and Europe, through 25 operating facilities, including recycling operations in ten of these plants. In addition to aluminum rolled products plants, our South American businesses include primary aluminum smelting and power generation facilities.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended March 31, 2013 filed with the United States Securities and Exchange Commission (SEC) on May 15, 2013. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairment of long lived assets and other intangible assets; (4) equity investments; (5) actuarial assumptions related to pension and other postretirement benefit plans; (6) tax uncertainties and valuation allowances; and (7) assessment of loss contingencies, including environmental and litigation liabilities. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.
Consolidation Policy
Our condensed consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate all significant intercompany accounts and transactions from our condensed consolidated financial statements.
We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. Consolidated “Net income (loss) attributable to our common shareholder” includes our share of net income (loss) of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the consolidated financial statements for consolidated entities, compared to a two-line presentation of equity method investments and net losses.

8

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

Recently Adopted Accounting Standards
Effective for the first quarter of fiscal 2014, we adopted Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in this update require us to disclose information about offsetting and related arrangements to enable users of our financial statements to understand the effect of those arrangements on our financial position. The adoption of this standard had no impact on our consolidated financial position or results of operations, but required additional disclosure in Note 13 - Fair Value Measurements.
Effective for the first quarter of fiscal 2014, we adopted Financial Accounting Standards Board ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendment requires that we present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, we would instead cross reference to the related footnote for additional information. The adoption of this standard had no impact on our consolidated financial position or results of operations, but required additional disclosure for which we added in Note 12 - Accumulated Other Comprehensive Income (Loss).
Recently Issued Accounting Standards    
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendments in this update provide clarification regarding the release of a cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The guidance will be effective for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods. The guidance will be applied prospectively. We will adopt this standard in our first quarter ending June 30, 2015.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The guidance will be effective for annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods. The guidance will be applied prospectively. We will adopt this standard in our first quarter ending June 30, 2014. We do not expect the standard will have a material impact to our consolidated financial position or results of operations.


9

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

2.    RESTRUCTURING PROGRAMS
“Restructuring charges, net” for the three months ended June 30, 2013 and 2012 were $9 million and $5 million, respectively. The following table summarizes our restructuring liability activity by segment (in millions).
 
 
North
America
 
Europe
 
Asia
 
South
America
 
Corporate
 
Total  Restructuring
Liabilities
Balance as of March 31, 2013
$
7

 
$
10

 
$

 
$
14

 
$
2

 
$
33

Provisions
1

 
7

 

 
1

 

 
9

Cash payments
(1
)
 
(3
)
 

 
(5
)
 

 
(9
)
Foreign currency translation and other

 

 

 
(1
)
 

 
(1
)
Balance as of June 30, 2013
$
7

 
$
14

 
$

 
$
9

 
$
2

 
$
32

As of June 30, 2013, $31 million of restructuring liabilities was classified as short-term and was included in "Accrued expenses and other current liabilities" and $1 million was classified as long-term and was included in "Other long-term liabilities" on our condensed consolidated balance sheets.
North America
Total “Restructuring charges, net” for the three months ended June 30, 2013 were $1 million, which consisted of severance costs related to relocation of our research and development operations. For the three months ended June 30, 2013, we made $1 million in severance payments related to previously announced separation programs.
As of June 30, 2013, the restructuring liability balance of $7 million was comprised of $5 million of severance costs and $2 million of other costs.
Europe
Total “Restructuring charges, net” for the three months ended June 30, 2013 consisted of $7 million of severance charges that reflect continuing efforts to reduce the cost of our business support organization for the European region. For the three months ended June 30, 2013, we made $3 million in severance payments related to these restructuring actions and previously announced separation programs.
As of June 30, 2013, the restructuring liability balance of $14 million was comprised of $13 million of severance costs and $1 million of environmental remediation liabilities and other costs.
South America
As of June 30, 2013, the restructuring liability balance of $9 million was comprised primarily of environmental remediation liabilities. For the three months ended June 30, 2013, we recorded an additional $1 million in severance and other exit related charges, made $3 million in severance payments and $2 million in other exit related payments primarily related to the closure of one of our two primary aluminum smelter lines.
Corporate
As of June 30, 2013, the restructuring liability balance of $2 million was comprised of lease termination costs incurred in the relocation of our corporate headquarters to a new facility in Atlanta, Georgia and other contract termination fees.
 


10

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

3.    INVENTORIES
Inventories consisted of the following (in millions).
 
 
June 30, 2013
 
March 31, 2013
Finished goods
$
222

 
$
245

Work in process
470

 
502

Raw materials
351

 
319

Supplies
104

 
102

Inventories
$
1,147

 
$
1,168



4.    ASSETS HELD FOR SALE
In fiscal 2013, we made the decision to sell our bauxite mining rights and certain alumina assets and related liabilities in Brazil to our parent company, Hindalco. As of June 30, 2013 and March 31, 2013, we classified the related assets and liabilities as “Assets held for sale” and “Liabilities held for sale” in the condensed consolidated balance sheets. The net assets held for sale are recorded at their carrying amount. In August 2013, we sold the assets and related liabilities to Hindalco for $8 million in cash. The sales price approximates the net book value of the assets and liabilities sold; therefore, we estimate recording an immaterial gain or loss in the three months ended September 30, 2013.
During the three months ended June 30, 2012, we sold three aluminum foil and packaging plants in our Europe segment to American Industrial Acquisition Corporation (AIAC) and we recorded a gain on the disposal of these assets and liabilities of $5 million, which was recorded as “Gain on assets held for sale” in the condensed consolidated statement of operations. The transaction included foil rolling and packaging operations in Rugles, France; Dudelange, Luxembourg; and Berlin, Germany. The transaction was a step in aligning our growth strategy of supplying aluminum flat-rolled products ("FRP") to the higher-volume, premium markets of beverage cans, automobiles and specialty products. There were no assets or liabilities held for sale related to the sale of these plants as of June 30, 2013 and March 31, 2013.
The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale (in millions).
 
June 30,
2013
 
March 31,
2013
Assets held for sale
 
 
 
Property, plant and equipment, net
9

 
9

Total assets held for sale
$
9

 
$
9

 
 
 
 
Liabilities held for sale
 
 
 
Other liabilities
1

 
1

Total liabilities held for sale
$
1

 
$
1




11

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

5.    CONSOLIDATION

Variable Interest Entities (VIE)
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We have a joint interest in Logan Aluminum Inc. (Logan) with Tri-Arrows Aluminum Inc. (Tri-Arrows). Logan processes metal received from Novelis and Tri-Arrows and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and Tri-Arrows to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other material support to Logan. Logan’s creditors do not have recourse to our general credit.
Novelis has a majority voting right on Logan’s board of directors and has the ability to direct the majority of Logan’s production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify Novelis as Logan’s primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances have been eliminated.
The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated in our condensed consolidated balance sheets (in millions). There are significant other assets used in the operations of Logan that are not part of the joint venture, as they are directly owned and consolidated by Novelis or Tri-Arrows.
 
 
June 30, 2013
 
March 31, 2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$

 
$
1

Accounts receivable
45

 
35

Inventories
38

 
38

Prepaid expenses and other current assets
1

 
1

Total current assets
84

 
75

Property, plant and equipment, net
6

 
17

Goodwill
12

 
12

Deferred income taxes
68

 
68

Other long-term assets
2

 
3

Total assets
$
172

 
$
175

Liabilities
 
 
 
Current liabilities
 
 
 
Accounts payable
$
26

 
$
29

Accrued expenses and other current liabilities
13

 
14

Total current liabilities
39

 
43

Accrued postretirement benefits
155

 
154

Other long-term liabilities
3

 
3

Total liabilities
$
197

 
$
200

 


12

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

6.
INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS

Included in the accompanying condensed consolidated financial statements are transactions and balances arising from businesses we conduct with our non-consolidated affiliates, which we classify as related party transactions and balances. We earned less than $1 million of interest income on a loan due from a non-consolidated affiliate, Aluminium Norf GmbH (Alunorf), during each of the periods presented in the table below. We believe collection of the full receivable from Alunorf is probable; thus no allowance for loan loss was provided for this loan as of June 30, 2013 and March 31, 2013.

We have guaranteed the indebtedness for a credit facility and loan on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of June 30, 2013, our guarantee was less than $1 million.

The following table summarizes the results of operations of our equity method affiliates in aggregate for the three months ended June 30, 2013 and 2012. It also describes the nature and amounts of significant transactions that we had with our non-consolidated affiliates (in millions). 

 
Three Months Ended June 30,
 
2013
 
2012
Net sales
$
131

 
$
122

Costs and expenses related to net sales
127

 
119

Provision for taxes on income
4

 

Net income
$

 
$
3

Purchase of tolling services from Aluminium Norf GmbH (Alunorf)
$
66

 
$
61

The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions).
 
 
June 30,
2013
 
March 31,
2013
Accounts receivable-related parties
$
45

 
$
38

Other long-term assets-related parties
$
13

 
$
13

Accounts payable-related parties
$
50

 
$
47

Transactions with Hindalco
We occasionally have related party transactions with our parent company, Hindalco. During the three months ended June 30, 2013 and 2012, “Net sales” were less than $1 million between Novelis and our parent. As of June 30, 2013 and March 31, 2013, there were no "Accounts receivable, net" outstanding related to transactions with Hindalco.




13

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)


7.    DEBT
Debt consisted of the following (in millions).
 
June 30, 2013
 
March 31, 2013
 
Interest
Rates(A)
 
Principal
 
Unamortized
Carrying  Value
Adjustments
 
 
 
Carrying
Value
 
Principal
 
Unamortized
Carrying  Value
Adjustments
 
 
 
Carrying
Value
Third party debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short term borrowings
3.14
%
 
$
719

 
$

 
  
 
$
719

 
$
468

 
$

 
  
 
$
468

Novelis Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate Term Loan Facility, due March 2017
3.75
%
 
1,763

 
(25
)
 
(B) 
 
1,738

 
1,767

 
(27
)
 
(B) 
 
1,740

8.375% Senior Notes, due December 2017
8.375
%
 
1,100

 

 
  
 
1,100

 
1,100

 

 
  
 
1,100

8.75% Senior Notes, due December 2020
8.75
%
 
1,400

 

 
  
 
1,400

 
1,400

 

 
 
 
1,400

Capital lease obligations, due through July 2017
3.64
%
 
12

 

 
 
 
12

 
12

 

 
 
 
12

Novelis Korea Limited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, due December 2014 through December 2015 (KRW 166 billion)
3.66
%
 
144

 

 
  
 
144

 
149

 

 
  
 
149

Novelis Switzerland S.A.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital lease obligation, due through December 2019 (Swiss francs (CHF) 35 million)
7.50
%
 
37

 
(1
)
 
 
 
36

 
38

 
(1
)
 
 
 
37

Novelis do Brasil Ltda.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BNDES loans, due March 2014 through April 2021(BRL R$34 million)
6.15
%
 
15

 
(3
)
 
 
 
12

 
18

 
(3
)
 
 
 
15

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, due through December 2020
4.33
%
 
11

 

 
  
 
11

 
11

 

 
  
 
11

Total debt — third parties
 
 
5,201

 
(29
)
 
 
 
5,172

 
4,963

 
(31
)
 
 
 
4,932

Less: Short-term borrowings
 
 
(719
)
 

 
  
 
(719
)
 
(468
)
 

 
  
 
(468
)
Current portion of long term debt
 
 
$
(30
)
 

 
  
 
$
(30
)
 
$
(30
)
 

 
  
 
$
(30
)
Long-term debt, net of current portion — third parties:
 
 
$
4,452

 
$
(29
)
 
 
 
$
4,423

 
$
4,465

 
$
(31
)
 
 
 
$
4,434


(A)
Interest rates are the fixed or variable rates as specified in the debt instruments (not the effective interest rate) as of June 30, 2013, and therefore, exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of purchase accounting in connection with Hindalco's purchase of Novelis and accretion/amortization of debt issuance costs related to the debt exchange completed in fiscal 2009 and the series of refinancing transactions and additional borrowings we completed in fiscal 2011, 2012 and 2013. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.

(B)
Debt existing at the time of Hindalco's purchase of Novelis was recorded at fair value. In connection with a series of refinancing transactions a portion of the historical fair value adjustments were allocated to the Term Loan Facility. The balance also includes the unamortized discount on the Term Loan Facility.


14

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized carrying value adjustments and using exchange rates as of June 30, 2013 for our debt denominated in foreign currencies) are as follows (in millions).
 
As of June 30, 2013
Amount
Short-term borrowings and Current portion of long-term debt due within one year
$
749

2 years
73

3 years
140

4 years
1,719

5 years
1,109

Thereafter
1,411

Total
$
5,201

Senior Secured Credit Facilities
     As of June 30, 2013, we had senior secured credit facilities which consist of (1) a $1.8 billion four-year secured term loan credit facility (Term Loan Facility) and (2) a $1 billion five-year asset based loan facility (ABL Revolver). The Term Loan Facility interest rate is equal to LIBOR (with a floor of 1%) plus a spread of 2.75%, at all times.
In May 2013, we amended and extended our old five-year asset based loan facility (ABL Facility) by entering into a $1.0 billion, five-year, ABL Revolver bearing an interest rate of LIBOR plus a spread of 1.75% to 2.25% or prime plus a spread of 0.75% to 1.25% based on excess availability. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million, subject to approval by the lenders of the Term Loan Facility and ABL Revolver. The new ABL Revolver has various customary covenants including maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $110 million and (2) 15% of the lesser of (a) the Credit Facility and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL defined EBITDA less (b) maintenance capital expenditures less (c) cash taxes; to (2) (a) interest expense plus (b) scheduled principal payments plus (c) dividends to the Company's direct holding company to pay certain taxes, operating expenses and management fees and repurchases of equity interests from employees, officers and directors. The facility matures on May 13, 2018; provided that, in the event that any of the Notes or the Term Loan Facility is outstanding (and not refinanced with a maturity date later than November 13, 2018) 90 days prior to their respective maturity dates, then the ABL Revolver will mature 90 days prior to the maturity date for the Notes or the Term Loan Facility, unless excess availability under the ABL Revolver is at least (i) 25% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and a minimum fixed charged ratio test of at least 1.25 to 1 is met.
The senior secured credit facilities contain various affirmative covenants, including covenants with respect to our financial statements, litigation and other reporting requirements, insurance, payment of taxes, employee benefits and (subject to certain limitations) causing new subsidiaries to pledge collateral and guaranty our obligations. The senior secured credit facilities also include various customary negative covenants and events of default, including limitations on our ability to (1) make certain restricted payments, (2) incur additional indebtedness, (3) sell certain assets, (4) enter into sale and leaseback transactions, (5) make investments, loans and advances, (6) pay dividends and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. Substantially all of our assets are pledged as collateral under the senior secured credit facilities. As of June 30, 2013, we were in compliance with the covenants in the Term Loan Facility and ABL Revolver.

Short-Term Borrowings
As of June 30, 2013, our short-term borrowings were $719 million consisting of $550 million of loans under our ABL Revolver, $44 million (KRW 50 billion) in Novelis Korea loans, $124 million in Novelis Brazil loans, and $1 million (VND 23 billion) in Novelis Vietnam loans. The weighted average interest rate on our total short-term borrowings was 3.14% and 4.83% as of June 30, 2013 and March 31, 2013, respectively.

As of June 30, 2013, $25 million of the ABL Revolver was utilized for letters of credit, and we had $411 million in remaining availability under the ABL Revolver. As of June 30, 2013, we had $3 million of outstanding letters of credit in Korea which are not related to the ABL Revolver.

15

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)


In May 2013, Novelis Korea entered into two new revolving loan facilities with two banks. One of the facilities has a borrowing capacity of $26 million (KRW 30 billion) and bears an interest rate of the three month financial rate as published by the Korea Financial Investment Association plus a spread of 1.6%. The second facility has a borrowing capacity of $44 million (KRW 50 billion) and bears an interest rate tied to Korea's three month CD rate plus a spread of 1.25%. Both facilities mature in May 2015. As of June 30, 2013, we had no borrowings outstanding under these revolving loan facilities.
Senior Notes
On December 17, 2010, we issued $1.1 billion in aggregate principal amount of 8.375% Senior Notes Due 2017 (the 2017 Notes) and $1.4 billion in aggregate principal amount of 8.75% Senior Notes Due 2020 (the 2020 Notes, and together with the 2017 Notes, the Notes). On October 12, 2012, we elected to redeem all of our outstanding 7.25% Senior Notes due 2015 (the 7.25% Notes). We made payments to the holders of the outstanding 7.25% Notes of $76 million and retired them during the third quarter of fiscal year 2013.
The Notes contain customary covenants and events of default that will limit our ability and, in certain instances, the ability of certain of our subsidiaries to (1) incur additional debt and provide additional guarantees, (2) pay dividends beyond certain amounts and make other restricted payments, (3) create or permit certain liens, (4) make certain asset sales, (5) use the proceeds from the sales of assets and subsidiary stock, (6) create or permit restrictions on the ability of certain of the Company's subsidiaries to pay dividends or make other distributions to the Company, (7) engage in certain transactions with affiliates, (8) enter into sale and leaseback transactions, (9) designate subsidiaries as unrestricted subsidiaries and (10) consolidate, merge or transfer all or substantially all of the our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc., a division of the McGraw-Hill Companies, Inc. or Moody's Investors Service, Inc. have assigned an investment grade credit rating to the Notes and no default or event of default under the Indenture has occurred and is continuing, most of the covenants will be suspended. As of June 30, 2013, we were in compliance with the covenants in the Notes.
Long-term Korean Bank Loans
As of June 30, 2013, Novelis Korea had $144 million (KRW 166 billion) of outstanding long-term loans with various banks. One of the loans has a fixed interest rate of 3.61% and a maturity of December 2015 and all other loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.88% to 1.41% with maturity dates ranging from December 2014 to December 2015. The weighted average interest rate is 3.66% as of June 30, 2013.
Long-term Brazil BNDES Loans
From February 2011 through September 2012, Novelis Brazil entered into loan agreements with Brazil’s National Bank for Economic and Social Development (the BNDES loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of June 30, 2013, we had $15 million (BRL R$34 million) outstanding under the BNDES loan agreements at a current weighted average rate of 6.2% with maturity dates from March 2014 through April 2021.

Other Long-term debt
In December 2004, Novelis Switzerland entered into a fifteen-year capital lease obligation with Alcan for assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of CHF 1.7 million, which is equivalent to $3 million at the exchange rate as of June 30, 2013. As of June 30, 2013, we had $37 million outstanding under this capital lease.
During fiscal 2013, Novelis Inc. entered into various five-year capital lease arrangements to upgrade and expand our information technology infrastructure. As of June 30, 2013, we had $12 million outstanding under these capital leases.
As of June 30, 2013, we had $11 million of other capital lease obligations and loans in Asia with due dates through December 2020.
Interest Rate Swaps
We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt. See Note 11- Financial Instruments and Commodity Contracts for further information about these interest rate swaps.

16

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)


8.    SHARE-BASED COMPENSATION
The Company's board of directors has authorized long term incentive plans (LTIP), under which Hindalco stock appreciation rights (Hindalco SARs), Novelis stock appreciation rights (Novelis SARs), and phantom restricted stock units (RSUs) are granted to certain executive officers and key employees.
The Hindalco and Novelis SARs will each vest at the rate of 25% per year, subject to the achievement of an annual performance target, and expire 7 years from their original grant date. Each Hindalco SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant and the market value on the date of exercise. Each Novelis SAR is to be settled in cash based on the difference between the fair value of one Novelis phantom share on the original date of grant and the fair value of a phantom share on the date of the exercise. The amount of cash paid to settle Hindalco SARs and Novelis SARs are limited to two and a half or three times the target payout, depending on the plan year. The Hindalco and Novelis SARs do not transfer any shareholder rights in Hindalco or Novelis to a participant. The Hindalco and Novelis SARs are classified as liability awards and are remeasured at fair value each reporting period until the SARs are settled.
The performance criterion for vesting of both the Hindalco and Novelis SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target operating EBITDA. Given that the performance criterion is based on an earnings target in a future period for each fiscal year, the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined.
The RSUs vest in full three years from the grant date, subject to continued employment with the Company, but are not subject to performance criteria. Each RSU is to be settled in cash equal to the market value of one Hindalco share. The payout on the RSUs is limited to three times the market value of one Hindalco share measured on the original date of grant. The RSUs are classified as liability awards and expensed over the requisite service period (three years) based on the Hindalco stock price as of each balance sheet date.
On May 13, 2013, the Company's board of directors amended the long-term incentive plans for fiscal years 2010 - 2013 (FY 2010 Plan), fiscal years 2011- 2014 (FY 2011 Plan), fiscal years 2012 - 2015 (FY 2012 Plan) and fiscal years 2013 - 2016 (FY 2013 Plan). The amendment gave each participant the option to cancel a portion of their outstanding Hindalco SARs for a lump-sum cash payment and/or the issuance of new Novelis SARs. The remaining Hindalco SARs and the new Novelis SARs will continue to vest according to the terms and conditions of the original grant. The following tables reflect the activity related to the participants elections under the amendment.
Total compensation expense (income) related to Hindalco SARs, Novelis SARs, and RSUs under the plans for the respective periods is presented in the table below (in millions). These amounts are included in “Selling, general and administrative expenses” or "Cost of goods sold (exclusive of depreciation and amortization)" in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2015, 2016 and 2017 have not yet been established, measurement periods for Hindalco and Novelis SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year Hindalco and Novelis SARs has been recorded.

 
Three Months Ended June 30,
 
2013
 
2012
Total compensation expense (income)
$
13

 
$
(2
)
 

17

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)


The table below shows the Hindalco SARs activity for the three months ended June 30, 2013.
 
 
Number of
SARs
 
Weighted
Average
Exercise Price
(in Indian Rupees)
 
Weighted Average
Remaining
Contractual Term
(In years)

 
Aggregate
Intrinsic
Value (USD
in millions)
SARs outstanding as of March 31, 2013
 
38,971,573

 
120.40

 
4.8

 
$
2

Granted
 
7,125,617

 
105.10

 
7.0

 

Exercised
 
(191,836
)
 
63.29

 

 

Forfeited/Cancelled
 
(12,161,025
)
 
132.07

 

 

SARs outstanding as of June 30, 2013
 
33,744,329

 
110.75

 
4.4

 
$
2

SARs exercisable as of June 30, 2013
 
10,165,393

 
103.51

 
 
 
 
 
The table below shows the Novelis SARs activity for the three months ended June 30, 2013.

 
 
Number of
SARs
 
Weighted
Average
Exercise Price
(in USD)
 
Weighted Average
Remaining
Contractual Term
(In years)
 
Aggregate
Intrinsic
Value (USD
in millions)
SARs outstanding as of March 31, 2013
 

 

 

 
$

Granted
 
13,261,976

 
94.81

 
5.0

 
1

Exercised
 

 

 

 

Forfeited/Cancelled
 

 

 

 

SARs outstanding as of June 30, 2013
 
13,261,976

 
94.81

 
4.9

 
$
1

SARs exercisable as of June 30, 2013
 
2,095,729

 
101.81

 
 
 
 

The table below shows the RSUs activity for the three months ended June 30, 2013.
 
 
Number of
RSUs
 
Grant Date Fair
Value
(in Indian Rupees)
 
Aggregate
Intrinsic
Value (USD
in millions)
RSUs outstanding as of March 31, 2013
 
3,591,406

 
136.22

 
$
5

Granted
 
2,035,506

 
104.96

 
4

Exercised
 
(727,490
)
 
107.05

 
1

Forfeited/Cancelled
 
(70,934
)
 
119.92

 

RSUs outstanding as of June 30, 2013
 
4,828,488

 
120.98

 
$
8



The fair value of each unvested Hindalco SAR was estimated using the following assumptions:
 
 
Three Months Ended June 30,
 
 
2013
 
2012
Risk-free interest rate
 
7.63% - 7.75%

 
8.08% - 8.24%

Dividend yield
 
1.40
%
 
1.29
%
Volatility
 
39% - 52%

 
51% - 55%



18

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

    The fair value of each unvested Novelis SAR was estimated using the following assumptions:
 
 
Three Months Ended June 30,
 
 
2013
 
2012
Risk-free interest rate
 
1.00% - 1.66%

 
%
Dividend yield
 
%
 
%
Volatility
 
31% - 41%

 
%

The fair value of each unvested Hindalco SAR was based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The risk-free interest rate is based on Indian treasury yields interpolated for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures. The dividend yield is estimated to be the annual dividend of the Hindalco stock over the remaining contractual lives of the Hindalco SARs. The value of each vested Hindalco SAR is remeasured at fair value each reporting period based on the excess of the current stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Hindalco SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.

The fair value of each unvested Novelis SAR was based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used the historical volatility of comparable companies to determine expected volatility assumptions. The risk-free interest rate is based on U.S. treasury yields for a time period corresponding to the remaining contractual life as of valuation date. The forfeiture rate is estimated based on actual historical forfeitures of Hindalco SARs. The value of each vested Novelis SAR is remeasured at fair value each reporting period based on the percentage increase in the current Novelis phantom stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Novelis SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.
The cash payments made to settle Hindalco SAR liabilities were $13 million in the three months ended June 30, 2013, which primarily relates to payments made to participants that elected to cancel their outstanding Hindalco SARs as part of the amendment discussed above. Total cash payments made to settle Hindalco RSUs were $1 million in the three months ended June 30, 2013. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $8 million, which is expected to be recognized over a weighted average period of 2.2 years. Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was $16 million, which is expected to be recognized over a weighted average period of 1.8 years. Unrecognized compensation expense related to the RSUs was $6 million, which will be recognized over the remaining weighted average vesting period of 2.0 years.




19

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)


9.    POSTRETIREMENT BENEFIT PLANS
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K.; unfunded pension plans in Germany; unfunded lump sum indemnities in France, Malaysia and Italy; and partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefit Plans, as shown in certain tables below) include unfunded healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.
 
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
 
 
Pension Benefit Plans
 
Other Benefit Plans
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
13

 
$
11

 
$
3

 
$
3

Interest cost
16

 
16

 
2

 
2

Expected return on assets
(16
)
 
(16
)
 

 

Amortization — losses
5

 
6

 
1

 
1

Net periodic benefit cost
$
18

 
$
17

 
$
6

 
$
6

 
 
 
 
 
 
 
 
     
The expected long-term rate of return on plan assets is 6.30% in fiscal 2014.
Employer Contributions to Plans
For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Korea, Malaysia and Brazil. We contributed the following amounts to all plans (in millions).
 
 
Three Months Ended June 30,
 
2013
 
2012
Funded pension plans
$
6

 
$
9

Unfunded pension plans
2

 
3

Savings and defined contribution pension plans
5

 
5

Total contributions
$
13

 
$
17

During the remainder of fiscal 2014, we expect to contribute an additional $15 million to our funded pension plans, $8 million to our unfunded pension plans and $15 million to our savings and defined contribution plans.




20

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

10.    CURRENCY (GAINS) LOSSES
The following currency (gains) losses were included in “Other (income) expense, net” in the accompanying condensed consolidated statements of operations (in millions).
 
 
Three Months Ended June 30,
 
2013
 
2012
Gain on remeasurement of monetary assets and liabilities, net
$
(18
)
 
$
(3
)
Loss released from accumulated other comprehensive income
1

 
1

Loss (gain) recognized on balance sheet remeasurement currency exchange contracts, net
12

 
(3
)
Currency gains, net
$
(5
)
 
$
(5
)

The following currency gains (losses) were included in “AOCI,” net of tax and “Noncontrolling interests” in the accompanying condensed consolidated balance sheets (in millions).
 
 
Three Months Ended June 30, 2013
 
Year Ended March 31, 2013
Cumulative currency translation adjustment — beginning of period
$
(30
)
 
$
23

Effect of changes in exchange rates
(3
)
 
(42
)
Sale of investment in foreign entities (A)

 
(11
)
Cumulative currency translation adjustment — end of period
$
(33
)
 
$
(30
)
 
(A)
We reclassified $11 million of cumulative currency gains from AOCI to "Gain on assets held for sale" in the year ended March 31, 2013 related to the sale of three aluminum foil and packaging plants in Europe. See Note 4 - Assets Held for Sale.


21

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

11.    FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The fair values of our financial instruments and commodity contracts as of June 30, 2013 and March 31, 2013 were as follows (in millions).
 
June 30, 2013
 
Assets
 
Liabilities
 
Net Fair Value
Assets/(Liabilities)
 
Current
 
Noncurrent
 
Current
 
Noncurrent(A)
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
30

 
$
1

 
$

 
$

 
$
31

Currency exchange contracts
1

 

 
(29
)
 
(26
)
 
(54
)
Net Investment hedges
 
 
 
 
 
 
 
 
 
Currency exchange contracts
1

 

 

 

 
1

Fair value hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts

 

 
(1
)
 
(2
)
 
(3
)
Total derivatives designated as hedging instruments
32

 
1

 
(30
)
 
(28
)
 
(25
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Aluminum contracts
53

 

 
(63
)
 
(1
)
 
(11
)
Currency exchange contracts
11

 

 
(15
)
 

 
(4
)
Energy contracts

 

 
(9
)
 
(19
)
 
(28
)
Total derivatives not designated as hedging instruments
64

 

 
(87
)
 
(20
)
 
(43
)
Total derivative fair value
$
96

 
$
1

 
$
(117
)
 
$
(48
)
 
$
(68
)
 
 
March 31, 2013
 
Assets
 
Liabilities
 
Net Fair Value
Assets/(Liabilities)
 
Current
 
Noncurrent
 
Current
 
Noncurrent(A)
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
24

 
$

 
$

 
$

 
$
24

Currency exchange contracts
12

 

 
(7
)
 
(8
)
 
(3
)
Energy contracts
1

 

 

 

 
1

Interest rate swaps

 

 
(1
)
 

 
(1
)
Fair value hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts

 

 
(1
)
 
(1
)
 
(2
)
Total derivatives designated as hedging instruments
37

 

 
(9
)
 
(9
)
 
19

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Aluminum contracts
49

 

 
(46
)
 
(1
)
 
2

Currency exchange contracts
21

 
1

 
(11
)
 

 
11

Energy contracts
2

 

 
(8
)
 
(19
)
 
(25
)
Total derivatives not designated as hedging instruments
72

 
1

 
(65
)
 
(20
)
 
(12
)
Total derivative fair value
$
109

 
$
1

 
$
(74
)
 
$
(29
)
 
$
7

 

22

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

(A)
The noncurrent portions of derivative liabilities are included in “Other long-term liabilities” in the accompanying condensed consolidated balance sheets.
 
Aluminum
We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag. We sell short-term LME aluminum forward contracts to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers. We also purchase forward contracts simultaneous with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to ensure we sell metal for the same price at which we purchase metal.
Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. We identify and designate certain aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. Such exposures do not extend beyond two years in length. We had 23 kt and 22 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of June 30, 2013 and March 31, 2013, respectively.
The following table summarizes the amount of gain (loss) recognized on fair value hedges of metal price risk:
 
 
Amount of Gain (Loss)
Recognized on Changes in Fair Value
 
 
Three Months Ended June 30,
 
 
2013
 
2012
Fair Value Hedges of Metal Price Risk
 
 
 
 
Derivative Contracts
 
(3
)
 
(8
)
Designated Hedged Items
 
3

 
7

Net Ineffectiveness (A)
 

 
(1
)

(A)
Effective portion is recorded in "Net sales" and net ineffectiveness in "Other (income) expense, net"
Price risk exposure arises from commitments to sell aluminum in future periods at fixed prices. We identify and designate certain aluminum forward purchase contracts as cash flow hedges of the metal price risk associated with our future metal purchases that vary based on changes in the price of aluminum. Such exposures do not extend beyond two years in length. We had 4 kt and 5 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of June 30, 2013 and March 31, 2013, respectively.
Price risk exposure arises due to the timing lag between the LME based pricing of raw material metal purchases and the LME based pricing of finished product sales. Price risk exposure also arises due to fixed costs associated with our smelter operations in South America. We identify and designate certain aluminum forward sales contracts as cash flow hedges of the metal price risk associated with our future metal sales that vary based on changes in the price of aluminum. Such exposures do not extend beyond two years in length. We had 216 kt and 210 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of June 30, 2013 and March 31, 2013, respectively.

23

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

The remaining balance of our aluminum derivative contracts are not designated as accounting hedges. As of June 30, 2013 and March 31, 2013, we had 45 kt and 36 kt, respectively, of outstanding aluminum sales contracts not designated as hedges. The average duration of undesignated contracts is less than seven months. The following table summarizes our notional amount (in kt).
 
 
June 30,
2013
 
March 31,
2013
Hedge Type
 
 
 
Cash flow purchases
4

 
5

Cash flow sales
(216
)
 
(210
)
Fair value
23

 
22

Not designated
(45
)
 
(36
)
Total
(234
)
 
(219
)
Foreign Currency
We use foreign exchange forward contracts, cross-currency swaps and options to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments and forecasted cash flows denominated in currencies other than the functional currency of certain operations.
We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures. We had $965 million and $918 million of outstanding foreign currency forwards designated as cash flow hedges as of June 30, 2013 and March 31, 2013, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to net investment in foreign subsidiaries. We had $53 million outstanding foreign currency forwards designated as net investment hedges as of June 30, 2013. As of March 31, 2013, we had no outstanding foreign currency forwards designated as net investment hedges.
As of both June 30, 2013 and March 31, 2013, we had outstanding currency exchange contracts with a total notional amount of $491 million and $620 million, respectively, which were not designated as hedges. Contracts that represent the majority of notional amounts will mature during the fourth quarter of fiscal 2015.
Energy
We own an interest in an electricity swap which we formerly designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of March 31, 2011, due to significant credit deterioration of our counterparty, we discontinued hedge accounting for this electricity swap. Approximately 1 million of notional megawatt hours remained outstanding as of June 30, 2013, and the fair value of this swap was a liability of $28 million as of June 30, 2013.
We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. We had 3.4 million MMBTUs designated as cash flow hedges as of June 30, 2013, and the fair value of these swaps was a liability of less than $1 million. There were 2.4 million MMBTUs of natural gas swaps designated as cash flow hedges as of March 31, 2013. As of June 30, 2013 and March 31, 2013, we had 1.0 million MMBTUs and 3.3 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. The fair value as of June 30, 2013 and March 31, 2013 was an asset of less than $1 million for the swaps not designated as hedges. Such exposures do not extend beyond 1 year in length. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
Interest Rate
As of June 30, 2013, we swapped $118 million (KRW 136 billion) floating rate loans to a weighted average fixed rate of 4.03%. All swaps expire concurrent with the maturity of the related loans. As of June 30, 2013 and March 31, 2013, $118 million (KRW136 billion) and $95 million (KRW106 billion) were designated as cash flow hedges, respectively.

 



24

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments not designated as hedges and the ineffectiveness of designated derivatives recognized in “Other (income) expense, net” (in millions). Gains (losses) recognized in other line items in the condensed consolidated statement of operations are separately disclosed within this footnote.
 
 
Three Months Ended June 30,
 
2013
 
2012
Derivative Instruments Not Designated as Hedges
 
 
 
Aluminum contracts
$
(2
)
 
$
6

Currency exchange contracts
(12
)
 
7

Energy contracts (A)

 
4

(Loss) gain recognized in "Other (income) expense, net"
(14
)
 
17

Derivative Instruments Designated as Hedges
 
 
 
Gain recognized in "Other (income) expense, net" (B)
10

 
10

Total (loss) gain recognized in "Other (income) expense, net"
$
(4
)
 
$
27

Balance sheet remeasurement currency exchange contracts
$
(13
)
 
$
2

Realized gains, net
21

 
12

Unrealized (losses) gains on other derivative instruments, net
(12
)
 
13

Total (loss) gain recognized in "Other (income) expense, net"
$
(4
)
 
$
27

 
(A)
Includes amounts related to de-designated electricity swap.
(B)
Amount includes: forward market premium/discount excluded from designated hedging relationships; hedging relationship ineffectiveness on designated aluminum contracts; and releases to income from AOCI on balance sheet remeasurement contracts.

 














25

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges and net investment der ivatives (in millions). Certain prior year amounts were revised to conform to the current year presentation. Within the next twelve months, we expect to reclassify $2 million of gains from “AOCI” to earnings, before taxes.
 
 
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Gain (Loss)
Recognized in “Other (Income)
Expense, net” (Ineffective and
Excluded Portion)
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Cash Flow hedging derivatives
 
 
 
 
 
 
 
Aluminum contracts
$
29

 
$
21

 
$
11

 
$
11

Currency exchange contracts
(51
)
 
(36
)
 

 
1

Energy contracts (A)
(2
)
 

 

 

Total Cash Flow hedging derivatives
$
(24
)
 
$
(15
)
 
$
11

 
$
12

Net Investment derivatives
 
 
 
 
 
 
 
Currency exchange contracts

 
1

 

 

Total
$
(24
)
 
$
(14
)
 
$
11

 
$
12

 
 
Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense)(Effective Portion) Three Months Ended June 30,
Location of Gain (Loss)
Reclassified from AOCI into
Earnings
Cash flow hedging derivatives
2013
 
2012
 
Energy contracts (A)
$
(1
)
 
$
(1
)
Other income, net
Aluminum contracts
21

 
18

Cost of goods sold
Aluminum contracts
2

 
2

Net sales
Currency exchange contracts
1

 
(3
)
Cost of goods sold 
Currency exchange contracts

 
(2
)
Net sales
Currency exchange contracts
(1
)
 
(1
)
Other income, net 
Total
$
22

 
$
13

 
 
(A)
Includes amounts related to de-designated electricity swap. AOCI related to this swap is amortized to income over the remaining term of the hedged item. There were no amounts reclassified from AOCI into income/(expense) related to natural gas swaps for the periods presented.

26

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

12.    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the change in the components of accumulated other comprehensive income (loss) net of tax, for the periods presented (in millions).
 
 
Currency Translation
 
Cash Flow Hedges
 
Postretirement Benefit Plans (A)
 
Total
Balance as of March 31, 2013
 
$
(33
)
 
$
(2
)
 
$
(233
)
 
$
(268
)
Other comprehensive income before reclassifications
 
(2
)
 
(29
)
 

 
(31
)
Amounts reclassified from AOCI
 

 
(15
)
 
4

 
(11
)
Net change in other comprehensive income (loss)
 
(2
)
 
(44
)
 
4

 
(42
)
Balance as of June 30, 2013
 
$
(35
)
 
$
(46
)
 
$
(229
)
 
$
(310
)
 
 
Currency Translation (B)
 
Cash Flow Hedges
 
Postretirement Benefit Plans (A)
 
Total
Balance as of March 31, 2012
 
$
20

 
$
(7
)
 
$
(204
)
 
$
(191
)
Other comprehensive income before reclassifications
 
(70
)
 
(11
)
 
11

 
(70
)
Amounts reclassified from AOCI
 
(11
)
 
(8
)
 
5

 
(14
)
Net change in other comprehensive income (loss)
 
(81
)
 
(19
)
 
16

 
(84
)
Balance as of June 30, 2012
 
$
(61
)
 
$
(26
)
 
$
(188
)
 
$
(275
)

(A)
For additional information on our Postretirement benefit plans see Note 9 - Postretirement Benefit Plans.
(B)  We reclassified $11 million of cumulative currency gains from AOCI to "Gain on assets held for sale" in the three months June 30, 2012 related to the sale of three aluminum foil and packaging plants in Europe. See Note 4 - Assets Held for Sale.

The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions).

 
Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense)(Effective Portion) Three Months Ended June 30,
Location of Gain (Loss)
Reclassified from AOCI into
Earnings
 
2013
 
2012
 
Energy contracts
$
(1
)
 
$
(1
)
Other income, net
Aluminum contracts
21

 
18

Cost of goods sold
Aluminum contracts
2

 
2

Net sales
Currency exchange contracts
1

 
(3
)
Cost of goods sold 
Currency exchange contracts

 
(2
)
Net sales
Currency exchange contracts
(1
)
 
(1
)
Other income, net 
 
22

 
13

Income before taxes
 
(7
)
 
(5
)
Income tax (provision)

$
15

 
$
8

Net income



27

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

13.    FAIR VALUE MEASUREMENTS
We record certain assets and liabilities, primarily derivative instruments, on our condensed consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent that observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that we have the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
Level 3 — Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing the asset or liability.
The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.
Derivative Contracts
For certain derivative contracts that have fair values based upon trades in liquid markets, such as aluminum and foreign exchange forward contracts and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency contracts, aluminum forwards and swaps and certain energy-related forward contracts (e.g., natural gas).
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. These derivatives include our electricity swap, which is one of our energy-related forward contracts, and represents an agreement to buy electricity at a fixed price at our Oswego, New York facility. Forward prices are not observable for this market, so we must make certain assumptions based on available information that we believe to be relevant to market participants. We use observable forward prices for a geographically nearby market and adjust for 1) historical spreads between the cash prices of the two markets, and 2) historical spreads between retail and wholesale prices.
The average forward price at June 30, 2013, estimated using the method described above, was $54 per megawatt hour, which represented a $6 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $48 per megawatt hour. Each $1 per megawatt hour decline in price decreases the valuation of the electricity swap by approximately $1 million.
For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk). As of June 30, 2013 and March 31, 2013, we did not have any Level 1 derivative contracts. No amounts were transferred between levels in the fair value hierarchy.
All of the Company's derivative instruments are carried at fair value in the statement of financial position prior to considering master netting agreements. The table below also discloses the net fair value of the derivative instruments after considering the impact of master netting agreements.



28

Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

The following tables present our derivative assets and liabilities which were measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of June 30, 2013 and March 31, 2013 (in millions).
 
 
June 30, 2013
 
March 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Level 2 Instruments
 
 
 
 
 
 
 
Aluminum contracts
$
84

 
$
(67
)
 
$
73

 
$
(49
)
Currency exchange contracts
13

 
(70
)
 
34

 
(26
)
Energy contracts

 

 
3

 

Interest rate swaps

 

 

 
(1
)
Total Level 2 Instruments
97

 
(137
)
 
110

 
(76
)
Level 3 Instruments
 
 
 
 
 
 
 
Energy contracts

 
(28
)
 

 
(27
)
Total Level 3 Instruments

 
(28
)
 

 
(27
)
Total Gross
$
97

 
$
(165
)
 
$
110

 
$
(103
)
Netting Adjustment (A)
(40
)
 
40

 
(35
)
 
35<